October 7, 2016 8 min read
The Swiss Federal Parliament has approved the Corporate Tax Reform Act III on June 17, 2016 after a long debate in consequence of the draft bill presented by the Federal Council in June 2015. A referendum can now be sought within 90 days. The left parties in Parliament have already an- nounced that they will seek a referendum. It is therefore probable that the Swiss people will have to vote on the tax reform presumably in 2017.
The Corporate Tax Reform III will abolish the can- tonal tax privileges as agreed with the European Union. The compensation measures introduced by the tax reform shall be the license box regime and additional tax deductions for research and devel- opment costs. Further, a step-up shall be granted on the built-in gain created during the time a com- pany benefited from a privileged tax regime or was based abroad. In addition, the Parliament decided to introduce a notional interest deduction at Feder- al level and, optionally, at cantonal level provided that the canton increases the minimum taxation of dividend income in the hands of individuals to at least 60%.
The Parliament has not introduced a general re- duction of corporate tax rates. The cantons are free to reduce their cantonal tax rates (as for ex- ample already decided by the canton of Vaud). The Parliament has given the cantons greater flex- ibility from a revenue point of view by increasing the share of the cantons in the revenue from the Federal income tax.
The Corporate Tax Reform Act III abolishes the cantonal tax privileges of the holding, domiciliary and mixed companies. The cantons are required to amend their cantonal tax codes. The tax privileges will be lifted and the companies will become sub- ject to standard taxation. The companies benefiting from the special tax regimes of the principal com- pany and finance branches will also lose their tax benefits.
The Corporate Tax Reform Act III does not provide for any further reduction of tax benefits. In particu- lar, the concepts of the participation exemption and the unilateral permanent establishment exemption will not be amended. These exemptions will still be granted, irrespective of whether the profits of the subsidiary or the foreign permanent establishment will be subject to tax in the foreign jurisdiction or whether there is any active business activity abroad.
The first element of the compensation measures is the introduction of the license box regime at can- tonal level. The regime shall not only apply to cor- porations but also to individuals and partnerships. A company benefiting from this regime can tax certain income from patents and other IP rights separately at reduced rates. The cantons have certain flexibility and can grant an exemption of up to 90%. Qualifying IP rights include patents and certain similar rights. The Corporate Tax Reform Act III follows certain ideas of the OECD BEPS project, in particular with regard to the modified nexus approach. This means that the privilege applies only to the extent of the Swiss R&D ex- penses in relation to the worldwide R&D expenses.
The privileged income needs to be determined based on the residual method (top-down ap- proach). This means that financing income and income with no relationship to patents and income from products with such patents are separated. Then, the privileged income is determined by tak- ing 100% of royalty income plus the remaining profit after deduction of the profit from routine func- tions and brand income.
The cantons will have the right to introduce addi- tional tax deductions for R&D expenses of up to 150%. These additional deductions shall only be granted for R&D activities in Switzerland for its own research and development or for contract R&D. It is up to the cantons to define the term R&D and the details of the deductions.
The Corporate Tax Reform Act III introduces at Federal level a notional interest deduction on a certain portion of the equity. The portion of the equity benefiting from the notional interest deduc- tion is defined as the equity exceeding the mini- mum equity as determined for each category of assets under the Swiss tax rules. The applicable interest rate is based on long-term interest rates of Swiss Confederation bonds and can in certain cases be increased to arm's length interest rates. In particular, group finance companies will benefit because they can determine the notional interest deduction based on a margin from their interest income.
The cantons shall also have the possibility to intro- duce this concept. However, they will be required to increase the taxable portion of dividend income in the hands of individuals to at least 60% if they intend to do so. Currently, several cantons provide for lower thresholds, for example Zurich.
The Corporate Tax Reform Act III provides for a legal basis for introducing a step-up for companies relocating to Switzerland and for companies that lose their cantonal tax privilege and become sub- ject to standard taxation. The step-up is granted on the built-in gain up to the fair market value on as- sets including goodwill but excluding equity in- vestments. The term of the depreciation depends on the type of asset. The maximum period is 10 years.
The new rule applies not only to companies relo- cating to Switzerland but also to companies mov- ing assets and functions from abroad to Switzer- land and for companies losing a tax holiday. A special rule applies for the cantonal and municipal corporate income tax to companies losing their holding, domiciliary and mixed privileges. They can determine the built-in gain at the time when they lose the tax privilege and can apply a separate lower corporate income tax rate if they realize a gain on such assets within a period of five years.
The cantons are allowed to introduce separate equity tax rates for equity related to equity invest- ments, patents and loans granted to group compa- nies. It will be up to the cantons to determine the exact amounts of reductions. This rule intends to reduce the increase in tax burden on equity of holding, domiciliary and mixed companies.
The Corporate Tax Reform II had introduced a privileged dividend taxation for individuals holding equity investments of at least 10%. While at feder- al level such dividends are taxable at 60%, many cantons introduced lower thresholds (for example Zurich 50%). If a canton intends to introduce a notional interest deduction, it has to increase the threshold of taxation of dividends for individuals to 60% such as the level for the Federal income tax.
The Corporate Tax Reform Act III also introduces tax credits for Swiss permanent establishments of foreign corporations for withholding taxes on cer- tain income from third countries.
If no referendum were sought, the Corporate In- come Tax Act III would become applicable as of January 1, 2017. The cantons will be granted time to amend their cantonal tax laws and abolish the cantonal tax privileges up to that date. However, the left parties in Parliament have announced that they will seek a referendum. It is therefore proba- ble that the Swiss people will vote on the reform. If such peoples' vote can already take place in early 2017, it is still possible to introduce the new rules by January 1, 2019. If the peoples' vote will solely be held in the second half of 2017, it is possible that the new rules will not be applicable before January 1, 2020.
Homburger AG
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